How to Build and Preserve Wealth

By Charles Rotblut, CFA, AAII
For all of the chatter coming out of the financial industry about building wealth, I continue to believe that two of the best methods for individual investors are process and automation. The likelihood of success is enhanced when a good process is put in place and automation is used when it is both reasonable and realistically possible to do so.

Process is how you go about managing your finances, or accomplishing any other task for that matter. The more clear, defined and easy to follow your process is, the more likely you will be to achieve the desired outcome. Checklists can really help: Have a list of procedures you follow when making decisions or taking certain actions and then refer back to this list regularly.

Let’s say you’re analyzing a stock. What do you look at? Chances are there are some characteristics you favor. Maybe it’s a certain valuation; perhaps it’s a certain level of growth. You could require a certain yield or a particular level of momentum in the price. I make a point of scanning through the 10-K report (an annual filing required by the U.S. Securities and Exchange Commission) to see if there is anything odd or alarming. Having a checklist of what specifically to look for can help you avoid skipping an important step. As much as we might think we do the same things every single time, we all get distracted and, at times, forgetful.

The process doesn’t just have to be a checklist. I maintain a spreadsheet for my savings accounts. It shows how much I should be/am setting aside each pay period for retirement and short-term savings. Every year, I adjust the numbers on the spreadsheet to boost the dollar amount I save for the forthcoming year. Part of this adjustment is reviewing what I’m saving on a percentage basis relative to my salary so that both my savings and savings rate increase over time. The spreadsheet is a simple, but highly effective way of keeping me on track to save regularly.

Those of you who have been long-term readers or have seen me speak over the years know that I’m a big a fan of notebooks. I currently maintain several notebooks between my personal and work life. They’re inexpensive, need no instruction on how to use and are great for tracking what you are doing. They're also good for writing down the rules you should be following. A reporter for The New York Times even made the case for choosing paper over digital apps last week.

As effective as notebooks and checklists are, they still rely on human interaction. This is where automation comes in. Automating regular tasks increases the odds that what you want done actually gets done. The contributions made to my and my wife’s retirement accounts are all automatic, as are the contributions to my “rainy day” savings account. (They all either come directly out of my paycheck or from my bank account every payday.) My mother-in-law’s required minimum distributions (RMDs) are set up to be distributed monthly to her bank account. Dividends paid by the funds and stocks my wife and I own are automatically reinvested. (Most online brokerage firms will facilitate this, not to mention all mutual fund families.) Some companies will automatically increase retirement plan [e.g., 401(k) plan] contributions for their workers (auto-escalation). You can even have your portfolio automatically rebalanced, if you choose to, via certain firms (e.g., robo-advisers). Some funds are also designed to be periodically rebalanced. Even many of your bills can be paid automatically; just be sure to look over them to ensure there are no suspicious charges.

Good processes combined with proper automation can build wealth because they put a barrier between the steps you should be taking and the emotions and distractions that may deter you from doing so. Plus, once they are set up, inertia and habit will kick in. Inertia and habit can help you stay on the right path by making it mentally tougher to shift away from what has now become your status quo.The Week Ahead

The U.S. financial markets will be closed on Monday, January 15, in observance of Martin Luther King Jr. Day.

Fourth-quarter earnings season will start to pick up steam, with 27 S&P 500 members reporting, mostly mega-cap companies. Included in this group are Dow Jones industrial average components: UnitedHealth Group Inc. (UNH) on Tuesday; Goldman Sachs Group Inc. (GS) on Wednesday; and American Express Co. (AXP) and International Business Machines (IBM) on Thursday.

The week’s first economic report will be the January Empire State Manufacturing Survey, released on Tuesday. Wednesday will feature December industrial production, the January housing market index and the Federal Reserve’s periodic Beige Book. December housing starts and building permits and the January Philadelphia Business Outlook Survey will be released on Thursday. The University of Michigan’s preliminary January consumer sentiment survey will be released on Friday.

Three Federal Reserve officials will make public appearances: Chicago president Charles Evans, Dallas president Robert Kaplan and Cleveland president Loretta Mester will all speak on Wednesday.

The Treasury Department will auction $13 billion of inflation-indexed securities (TIPS) on Thursday.